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All-Canadian, Ltd. is a multiproduct company with three divisions: Pacific Division, Plains Division, and Atlantic Division. The company has two sources of long-term capital: debt and equity. The interest rate on All-Canadian’s $404 million debt is 9 percent, and the company’s tax rate is 30 percent. The cost of All-Canadian’s equity capital is 10 percent. Moreover, the market value of the company’s equity is $606 million. (The book value of All-Canadian’s equity is $434 million, but that amount does not reflect the current value of the company’s assets or the value of intangible assets.)

The following data (in millions) pertain to All-Canadian’s three divisions.

Compute All-Canadian’s weighted-average cost of capital (WACC). (Do not round intermediate calculations. Round your final answer to 2 decimal places (i.e., .1234 should be entered as 12.34).)

Division Before-Tax Operating
Income Current
Liabilities Total
Assets Pacific $ 18 $ 8 $ 74 Plains 49 7 304 Atlantic 43 11 487

Explanation / Answer

1.All-Canadians Weighted average cost of capital =8.52%

Value of Debt                = $404 Million

Market Value of Equity = $606 Million

Total Value                    = $1010 Million

Cost of Debt         = 6.3% (9% x 0.70)

Cost of Equity      = 10%

Weighted average cost of capital = 6.3($404/$1010) + 10% ($606/$1010) = 8.52%

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